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In Illinois and Ohio, Turning Points in the War against Hospital Monopolies

Swedish American Hospital in Rockford, Illinois. Swedish would have benefited from the Rockford-OSF merger, as the second-largest player in a hospital duopoly. Image via Wikipedia.

One of the big reasons why health care is so expensive is because many hospitals have near-monopoly pricing power in their local markets. Even so, it’s been hard for the government’s antitrust agencies to block these mergers, because the courts have sided with the hospitals against the government. Today, from Illinois, we learn of some promising news: two hospitals have abandoned plans to merge, following a challenge from the Federal Trade Commission. Could this be a turning point in the war against hospital monopolies?

In May of 2010, Rockford Health System, a network of providers in northern Illinois, signed a letter of intent to join the OSF Healthcare System, a large network of providers in the same area, including 7 hospitals. (OSF stands for the Sisters of the Third Order of St. Francis, based in Peoria.)

The principal goal of the merger would be to combine two of Rockford’s oldest hospitals, the Rockford Memorial Hospital (part of Rockford Health System) and Saint Anthony Medical Center (part of OSF). The merger was formalized in February 2011, “pending federal and state regulatory approval and other customary closing conditions.”

Merger would have left Rockford with two hospitals instead of three

Currently, Rockford benefits from three different hospitals competing against one another. The RHS-OSF merger would have reduced that number to two. And studies show that when a local market goes from three hospitals to two, those hospitals take advantage of their duopoly status to raise prices by as much as 40 percent.

As a result, last November, the FTC announced that it would file an administrative complaint, challenging the RHS-OSF merger. “If OSF is allowed to acquire Rockford Health System, decades of competition between the defendants’ hospitals would end,” said Richard Feinstein, Director of the FTC’s Bureau of Competition, in an FTC press release. “This would lead to significantly higher costs that would be passed on to employers and to health care consumers in Rockford.” The release continues:

According to the FTC’s complaint, OSF’s proposed acquisition of Rockford Health System would violate federal antitrust laws by reducing competition in two markets in the Rockford area: 1) general acute-care inpatient services, and 2) primary care physician services. Specifically, OSF would control 64 percent of general acute-care inpatient services in the Rockford area post-acquisition, and face only one competitor, SwedishAmerican Health System. The two hospitals together would control more than 99 percent of the market for general acute-care services in the Rockford area. In the market for primary care physician services, today there are only three significant primary care physician groups in the Rockford area. The complaint alleges that, post-acquisition, OSF and SwedishAmerican together would control almost 60 percent of all primary care physician services.

This significant consolidation would give OSF greater leverage to raise rates, the complaint alleges, which would impose a significant financial burden on local employers and employees, either directly or through higher insurance premiums, co-pays, and other out-of-pocket expenses. The complaint also charges that OSF’s proposed acquisition would increase the incentives and ability for the two remaining hospitals in Rockford to engage in coordinated anticompetitive behavior, including sharing confidential information, deferring competitive initiatives, or aligning managed care contracting strategies. Importantly, the complaint alleges that OSF’s acquisition of Rockford Health System would also eliminate vital non-price competition among the Rockford hospitals, reducing the quality, convenience, and breadth of services provided to local residents.

The Commission vote to issue the administrative complaint and authorize staff to file a complaint seeking a temporary restraining order and preliminary injunction in federal district court was 4-0. A public version of the administrative complaint will be available on the agency’s website shortly, and the evidentiary hearing is scheduled before an administrative law judge at the FTC, beginning on April 17, 2012. The federal district court complaint will be filed in the U.S. District Court for the Northern District of Illinois, Western Division.

A major development in the case occurred last Thursday, when Judge Frederick J. Kapala of the U.S. District Court for the Northern District of Illinois enjoined the merger. Judge Kapala cited the work of Cory Capps, one of the leading economists on hospital consolidation, who testified at a hearing on the case.

Hospital-merger economists have made a difference

Capps had calculated that the merged Rockford Memorial Hospital and St. Anthony Medical Center would control 59 percent of patient admissions in the area for general acute care, and 64 percent of patient hospital days. The Herfindahl-Hirschmann Index—a measure of market share concentration—would rise from 3,411 to 5,179, based on patient admissions. (FTC merger guidelines suggest that HHIs above 2,500 indicate highly concentrated markets; an increase of 200 points suggests an unhealthy increase in market concentration.)

“Based on these market share calculations,” wrote Kapala, “the court has no trouble finding that the combined entity in this case would control ‘an undue percentage share of the relevant market.’” Kapala didn’t buy the argument that a merger would lead to enhanced efficiencies, citing “conflicting expert testimony and the uncertainty surrounding [certain] proposed consolidations.”

Yesterday, in light of the temporary injunction, RHS and OSF abandoned their merger plans. Prolonged litigation would require a “substantial commitment,” with an uncertain outcome.

In that case, another leading hospital-merger economist, Robert Town, estimated that the merger would allow St. Luke’s to raise prices by 38 percent, and other ProMedica hospitals to raise prices by 11 percent. The FTC discovered internal emails from the hospital systems anticipating that a merger would “significantly increase ProMedica’s bargaining leverage.”

The American Hospital Association, which constantly lobbies Congress to jack up prices and reduce competition, wasn’t happy. “The FTC decision, if upheld on appeal, could slow the pace of mergers and joint ventures needed to achieve the ambitious goals set for health care providers by the government, employers, and insurers,” said Melinda Hatton, AHA general counsel.

From 1993 to 2008, the Federal Trade Commission and the Justice Department failed to block a single hospital merger, because every time they tried, they were overruled by the courts. A large part of the problem, in those cases, was flawed studies from economists that suggested that hospital mergers did not lead to price increases. A second generation of studies, led by economists like Town and Capps, have shown that, in fact, hospital mergers do lead to increased prices, just like they do in every other part of the economy. This more recent work is clearly having an impact in the courtroom.

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Robert- No. The government is not a monopoly, but it has created government or STATE run monopolies, like the post office. And the post office doesn’t cost the tax payer a dime, even though Congress has it operating under more onerous rules than private business. Certain states choose to control the sale of alcohol or gambling that way, amung other things.

Thank you, Avik. Finally someone has pointed to the real problem with the “Capitalist” healthcare system. The fact is that Capitalism is the antithesis of a free market ecomomy. Thats not a rap on Capitalism, but just a statement of fact. True Capitalism abhors a free market economy. Its job is to eliminate it, if it can. Thats just the way it is. Now, if you can make the same argument about health insurance companies, we might finally get somewhere. And they also have the added benefit of having profits guaranteed by the state, in some very cozy arrangements, if you ask me. they actually behave more like utilities as opposed to “Private sector” entities. And given the massive Globalization of businesses in modern times, I’m not even sure what “Private sector” means anymore. Anyway, you hit the ball out of the park here, if you ask me.

While participating in “management” meetings at several THC owned hospitals, I noticed a theme. The hospital based “CEOs” complained bitterly about their lack of leverage with plans and payors such as BCBS. Most of the THC for profit hospitals had university teaching hospitals in the general area. These teaching hospitals had to be included in plans offered, b/c they were seen as the quality provider and of course had practice areas that the community hospitals did not. There were always discussions of mergers and alliances to better the THC hospitals bottom line.

I do hope the FTC, DOJ or HHS takes a close look at for profit hospital companies and their relentless mission to acquire and merge with community hospitals. This is a good start.

I don’t agree with you Paulina regarding, “to better the … hospitals bottom line.” The government has control of the bottomline with the influx of those that are becoming the greatest population in the hospital through the use of medicare, baby boomers. Medicare largely governs the bottomline of the hospitals in the U.S., therefore, all hospitals are driven by their quality care.

Who would blame a hospital merger from happening, with us knowing that their chief focus was to reach out to MORE people with quality care? A good proposition!!!

Be careful about attacking hospitals and other entities attempting to economize, and sometimes to even survive, by combining resources or creating economies of scale. Hospital mergers are an effect. It’s crucial to look beyond the mergers to WHY hospitals, physicians and insurance companies are deciding it is in their best interest to consolidate. Most of it has to do with government-determined rewards and penalties.